Morgan Stanley Says 'Spotify The Business' Has Joined 'Spotify The Product' In Delivering For Shareholders

Morgan Stanley analyst reiterated an Overweight rating on the shares of Spotify Technology SA SPOT and raised the price target from $190 to $200.

The analyst said 2023 highlighted the case for Spotify and has answered questions about its strength amongst tough competitors like Apple Inc AAPL, Amazon.com Inc AMZN etc and the unit economics of the business.

Spotify reported third-quarter FY23 revenue growth of 11% year-on-year to €3.36 billion ($3.65 billion), and EPS of €0.33 or $0.36, both above the street view.

According to the analyst, advertising revenue growth, marketplace growth, and leverage on other cost of sales drove expansion.

The analyst expects the company to deliver on its 30%+ gross margin and 10%+ operating margin target within the guidance range of '25-'27, but the confidence is rising, and the time to deliver is likely compressing.

Revenue growth is accelerating as price increases are sticking and user growth exceeds expectations, notes the analyst.

At this rate, the analyst says, Spotify’s intermediate term guidance of 20% revenue growth is starting to seem possible, but it would take a more frequent and substantial price increase, faster advertising revenue growth, and likely faster Premium user growth to reach 20% consistently over the next few years. 

The analyst now expects an EBITDA of $600 million and $1.3 billion in FY24 and FY25, with advancement in free cash flow.

Spotify's MAU and Premium subscribers should be growing 23% and 15% YoY, respectively, writes the analyst.

The results and guide reinforce the analyst’s theory that Spotify has the best product, pricing power, and can drive accelerating rev growth, gross margin expansion, with opex discipline. 

Price Action: SPOT shares are trading lower by 5.37% at $161.46 on the last check Wednesday.